Josephine Shillito: Luxembourg went from an international hub for Undertakings for Collective Investment in Transferable Securities (Ucits) to now being one of the most attractive places globally to base an alternative investment fund. How?
: Well, alternative assets have been expanding in Luxembourg for quite a while now. Rewind to 20 years ago, and you had the birth of private equity in Luxembourg. This was thanks in part to the presence of special-purpose vehicles for EU acquisitions domiciled here in Luxembourg for tax reasons. Yet real estate, infrastructure and, most recently, private debt have followed, and now Luxembourg is emerging as a hub to raise pan-European alternative investment funds.
The first benefit was a tax attraction. Is this still the case?
Luxembourg is now one of the principal jurisdictions in the world for private assets and, yes, the main reason at first was [the] tax reason. But when regulations like the Alternative Investment Fund Managers Directive (AIFMD) came in 2013, we saw a real ecosystem for infrastructure and service providers pop up, so it became a hub for managers across the world to set up funds.
What sort of changes did you see in Luxembourg post-AIFMD compared to pre-AIFMD?
One of the main differences is that pre-AIFMD, you would see feeder and parallel funds set up in Luxembourg for the European investor that would feed into the main fund that, for example, might be structured in the Cayman Islands. But with the AIFMD came a need for a European AIFM, and you saw the consolidation of structures in Luxembourg. Now, pretty much all US and UK fund managers want to have an AIFM based in Luxembourg.
So the attraction was tax driven and then regs driven?
You could say that. The financial regulator in Luxembourg, the CSSF, has been pragmatic, flexible and responsive in terms of its regulation. Then there was Brexit. When Brexit was voted for in 2016 and in the years after, jurisdictions like Ireland, Luxembourg and Germany benefited. What we saw is every private asset–such as private equity, real estate, infrastructure and private debt–head to Luxembourg, while banks positioned in Frankfurt, and hedge funds and collateralised loan obligations went to Ireland. Any worldwide team that had previously had a base in the UK was then considering a European jurisdiction.
What might the future drivers be?
Marketing. What we’re seeing now is Luxembourg positioning to attract alternative investment fund marketing teams. This is because UK-based fund managers are facing the issue of raising funds from the UK and into Europe now that they no longer benefit from the passport. The question that London-based marketing teams are asking themselves is: ‘How do we reach Europe?’ This is a huge focus of private assets at the moment. To market into Europe, you need to be regulated, you need to be compliant with AIFMD and the Markets in Financial Instruments Directive for the passport–and if you want that passport, you need to be based in the EU. This is a huge opportunity that Luxembourg is positioning itself for.
Luxembourg positioning as a marketing hub for alternative investment funds?
Yes. Luxembourg has already positioned itself as a jurisdiction for building an investor base. What we’re seeing is alternative investment fund managers putting a head of marketing in Luxembourg. It doesn’t need to be the main marketing person, but it needs to be someone. Imagine the head of investor relations, for example. Some people are already making this very smart move. This is interesting because formerly the head of marketing would have been in London or Paris.
Aside from the obvious attraction of the European passport, what are the other benefits of having marketing activities in Luxembourg?
The sophistication of Luxembourg’s financial services providers, its fund administrators and its depositories are very strong. This ecosystem is already in place and makes it an easy place to which to relocate operations. Then the country itself is becoming more attractive as a place to move to than it was a number of years ago. It’s a great country to live in, it’s a manageable size, for families it’s increasingly an attractive option compared to bigger cities. Some people love the greenery. I see some fund marketing managers already making this very smart move. Then Luxembourg has shown itself to be flexible, responsive, able to adapt to what the alternative investment fund market is expecting.
What expectations might the alternative investment fund market have that differentiate it from other types of fund markets in Luxembourg?
We are seeing the slow convergence of regulatory requirements, for example Ucits and AIFMD. There’s a lot of expertise in Luxembourg in these areas. Risk is also a big thing in private assets. Risk management is more important in this sphere due to the illiquid nature of the assets and their higher returns and therefore risks. Fortunately, all of that risk-management expertise is already in Luxembourg. Then the experience with past and upcoming regulation is important too.
Do you mean Eltif [the European regulations concerning the marketing of alternative investment funds to a wider investor pool]?
Yes. There are teams in Luxembourg that already have a strong experience of working closely with the Luxembourg regulator, the CSSF, on Ucits. This means that they will have a strong idea of how the CSSF will approach new rules regarding alternative investment funds. It is becoming important in Luxembourg to share valuable knowledge like this between teams. In Arendt, for example, we have a lot of meetings to share this knowledge between teams. Ucits is very well trusted, and those who have worked with the regulator on Ucits have very important insights for regulatory impacts on alternative funds.
Can you tell me more about Eltif?
There’s a huge appetite amongst alternative investment funds to target and raise money from family offices. Eltif [which gives alternative investment funds a regulatory structure through which to market to smaller investors such as family offices and ultra-high-net-worth individuals] gives them a means of doing this across Europe. In fact, there are around 70 Eltifs in Europe, and around 40 of these are in Luxembourg because the interaction with the CSSF on how to interpret Eltif is that good.
Eltif requires a certain liquidity so that smaller investors do not face long lock-ups of their money. One of the main questions funds are asking is: ‘How liquid is liquid enough?’ We have been able to look at fund redemptions to help us anticipate the regulation and to give us an idea of what the regulators will be looking for.
Luxembourg has put in a lot of effort with the Eltif; lobbying, working hard with the CSSF, there’s been a lot of effort preparing Luxembourg as a country for this.
What used to hold the Eltif back was the uncertainty around it, and Luxembourg has been keen to eradicate that uncertainty. This is a huge draw for alternative investment fund managers. We already have an idea of what the CSSF will be asking alternative fund managers for in order to class themselves as Eltif, and large fund managers are very attracted to this.
You say Eltif is a big draw of alternative funds to Luxembourg. How would you say it compares to the Long-Term Asset Fund (LTAF) [the UK equivalent]?
The LTAF is very attractive for UK-based private clients for UK-based investment. But it’s not finalised yet, and it doesn’t offer that European passport. So if you’re trying to convince a US-based client on where to put their vehicle, convincing them via a UK-based product is difficult. Most US clients will have a Luxembourg vehicle on their checklist. The Luxembourg products have taken over the market.
Can you tell me more about the Luxembourg products that attract alternative investment fund managers?
In Luxembourg we have the Special Limited Partnership, an unregulated structure to which you can apply a Raif (Reserved Alternative Investment Fund) or Eltif wrapper. The SLP is really rising in popularity. I’d say it has overtaken alternative structures such as the Specialised Investment Fund (Sif) or the Investment Company in Risk Capital (Sicar) because of its flexibility. As a pan-European way of raising capital, you can’t beat Luxembourg.
You said in the past it was common to have a feeder or parallel fund set up in Luxembourg and the main fund elsewhere. Has this changed?
Yes. Not only was there the consolidation after the AIFMD when fund managers began to place their AIFMs in Luxembourg, but the attractiveness now of the investment structures means that the main fund will also be domiciled in Luxembourg. More than €962bn of assets managed by alternative fund managers are based in Luxembourg, showing that it really is becoming a jurisdiction of flagship funds and not just feeders. However, it’s not just a question of volume, it’s a question of sophistication. The service providers are increasingly specialised, increasingly sophisticated, in the sense that this is no longer a back-office place.
What can the financial services industry do to support the development of alternative investment?
We believe that Luxembourg as a marketing hub is a huge opportunity. What we need to do as an industry is lobby to make it far easier for alternative investment managers to put their teams here. We need to work not just on the expertise, but on the attractiveness of the country to showcase Luxembourg as a place that listens, that is close to the market.
What is the role of law firms like Arendt in this?
Law firms have a lot to do here, not just in the field of alternative investment funds, but in many fields. Any alternative investment manager will find law firms in Luxembourg very well equipped to support fundraising into Europe. Their expertise and responsiveness are much better than they used to be, and within Europe, Luxembourg itself is far more respected than it used to be.
Looking forward, I’d say that we’re at the stage of succession planning in legal teams, and we’re finding the new generation of lawyers are proactive and not at all complacent. Luxembourg in the past used to have a reputation for sitting still and allowing business to come forward, but now we’re seeing a closeness to the market, the pragmatism of the CSSF and the sophistication of the service providers really creating a hub. We look forward to it continuing!
Now that the European Council has reached an agreement on Eltif, can you talk me through some of the principal changes and what that might mean for Luxembourg’s financial centre?
Now that the European Council has in principle reached an agreement on the Eltif review, we believe that this will result in additional traction for this vehicle. We welcome, more specifically, the possibility for-loan originating Eltifs to use leverage in the same way as other Eltifs; the funds of funds investments limitations that have been removed so that Eltifs will be able to invest in EU funds for this purpose; and more generally, the additional flexibility that has been granted with respect to the product design and definition of eligible assets.
Source link : https://delano.lu/article/as-a-pan-european-way-of-raisi
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Publish date : 2023-01-31 08:00:00
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